Great topic, I was just about to start one. Instead of messing around with Handbrake settings (which is quite good if you have some knowledge of video settings or like to experiment) I used DVD Catalyst 4, it has a built in Nexus 7 setting and converted several movies.
I had a great experience with it, nice interface and easy to use. Fairly quick as well.
Here's the link, there's a purchase link in the first paragraph (what I used) and it costs $9.95.
Ultimate Nexus 7 Video How To Guide | Tools4Movies | DVD Catalyst 4
Also.....get MX player from the Play Store. Works like a charm.